2018-06-18

China Enters the Trade Trap

Perhaps nobody know what President Trump will do next, including President Trump, but right now it looks like he has successfully maneuvered China into a trade trap. The goal is to slow China's economy such that military modernization slows and its economy cannot catch up with the United States. Meanwhile, implementation of this strategy is called "Beijing's playbook" and the whole time President Trump speaks positively about Xi Jinping and China's help in other areas.

“The Chinese view this as an exercise in self-flagellation, meaning that the country that wins a trade war is the country that can endure most pain,” said Andrew Polk, co-founder of research firm Trivium China in Beijing. China “thinks it can outlast the U.S. They don’t have to worry about an election in November, let alone two years from now.”

This is the mistake autocrats always make about Western governments and the United States. They view the messy and inefficient political system (intentionally designed that way to protect liberty) as a weakness. They think politicians care more about elections than anything else. They see the difficulty in reaching consensus as a weakness. However, they miss the fact that democratic governments enjoy greater legitimacy. If the U.S. reaches a majority in favor of confronting China on trade, then President Trump has the far stronger political hand.

Confronting China on trade raises President Trump's popularity. His base and independent voters favor this policy. Democrats oppose him because he is Trump, but they would lose votes if the only issue in November was "Confront China on trade, yes or no?"

If President Trump makes it through November losing only a few House seats (as is typical of nearly all mid-term elections) and sticks to his China trade policy, he will come out the other side incredibly strengthened on trade heading into 2020. If the public begins to view the trade war more as war than trade, they will want to win the war of attrition.

China's "ace" remains yuan devaluation. When I wrote The Logic of Strategy: Yuan Devaluation and the Road to Trade War, I expected economics to lead the way as the yuan devalued. Although the yuan weakened in 2015 and 2016, it was not the substantial depreciation needed to reset the financial system. Still, China created the conditions for a major currency depreciation and U.S. trade policy will soon lean heavily on this pressure point.

Finally, remember that geopolitics is right beneath the surface of the trade war. The U.S. is confronting China in the South China Sea. Pacific nations are turning against China.

China has warned its citizens in Vietnam after protesters clashed with police over a government plan to create new economic zones for foreign investment that has fuelled anti-Chinese sentiment in the country.

Relations between the two countries have cooled since late last year when Prime Minister Malcolm Turnbull’s government proposed a bill to limit foreign influence in Australia, including political donations. Beijing saw the move as “anti-China”.

Critics say President Trump's trade policy is poorly designed and antagonizes allies, but the Logic of Strategy says nations will come around to Trump's position in the coming months and years.